What’s New in the New Industrial Policy in Latin America?

Robert Devlin and Graciela Moguillansky

New Thinking on Industrial Policy International Economic Association-World Bank Roundtable May 22-23, 2012 Washington, D.C.

Motivation

“Proactive Government and Industrial Policy is Back !!”

Source: The New Yorker

Proactive Government and Industrial Policy Is Back in Latin America too!

• Industrial Policy is not new to Latin America– Early 20th century– Inter-war period– Era of state-led industrialization 1950—1980 (Ocampo, 2006)

• Results of era of state-led industrialization mixed and volatile.– Excessive protection– Lack of confidence in private sector (government as Evan’s (1995) “Demiurge”).– Lack of linkage between national plans and the budget.– Exports as tool for BOP but not learning and productive transformation– Over leveraging international bank credit and foreign debt– Fiscal and balance of payment crises– Authoritarian governments– “Lost decade”-- IP loses political legitimacy and Washington Consensus emerges

• After the Washington Consensus Latin America’s is launching a new industrial policy for the 21st century and it must be done right this time.

Why Industrial Policy is Necessary for Latin America

What IP Can Address in Latin America• Mexico-Central America-Dominican Republic

– Advantage of free trade access to US and EU• Growth and diversification of exports• Low, medium and hi-tech exports

– But…• “Maquila” with low value-added• Little geographical diversification• Export concentration in undynamic products

• South America– Bonanza of commodity prices… But….

• Colombia and Peru must upgrade to exploit US FTA.• Resource-based manufactures have low engineering content even compared to

AUSTRALIA and NEW ZEALAND• Export concentration in undynamic sectors • “Deindustrialization”• Dependence on commodities prices=vulnerability

What IP Can Address in Latin America• Upgrade SMEs with potential for entering or climbing

up international value chains.• Engage large domestic business groups

– Incentives for more innovation and expenditure on R&D.

– Incentives for more linkages with the domestic economy and SMEs.

– Apply competition policy when they are asphyxiating local enterprise development.

• The major challenge and opportunity of climate change

• Give a strategic thrust to FDI attraction

Competitiveness

Only Chile and Barbados in top 50 of Global Competitiveness Index…….

….but still weak in dynamic drivers of growth like education and innovation.

Latin America and the Caribbean

11 Extraregional Cases plus U.S. and China

Source - World Economic Forum. Global Competitiveness Report 2010-2011. 139 countries.

Country Overall RankingChile 30Barbados 43Panama 53Costa Rica 56Brazil 58Uruguay 64Mexico 66Colombia 68Peru 73Guatemala 78El Salvador 82Trinidad & Tobago 84Argentina 87Honduras 91Jamaica 95Dominican Republic 101Ecuador 105Bolivia 108Guyana 110Nicaragua 112Paraguay 120Venezuela 122

Country Overall RankingSweden 2Singapore 3United States 4Finland 7Canada 10Australia 16Korea 22New Zealand 23Malaysia 26China 27Ireland 29Czech Republic 36Spain 42

Global Competitiveness Index

Latin America’s Growth Performance is Comparatively Mediocre

  2000-2009 2010 2011 2012

East Asia and the Pacific 9.4 9.7 8.2 

7.8 China 10.9 8.5 9.1 8.4Europe and Central Asia 5.8 5.2 5.3 4.0                Turkey     4.9 9.0 8.2 2.9Latin America and the Caribbean 3.8 6.0 4.2 3.6 Brazil    3.6 7.5 2.9 3.4 Colombia 4.5 4.3 5.6 4.4 Mexico 2.2 5.5 4.0 3.2 Argentina 5.4 9 .2 7.5 3.4Middle East and N. Africa   4.7 3.6 1.7 2.3South Asia  7.3 9.1 6.6 5.8                India 7.9 8.7 6.5 6.5Sub-Sahara Africa 5.1 4.8 4.9 5.3

GDP Growth (%)

Source: World Bank, World Development Indicators (2011) and Global Economic Prospects(2012)

What’s New in the New Industrial Policy?

What’s New in the New Industrial Policy?

• Entirely different context for applying IP– Democratic politics– Culture of macroeconomic stability– Private sector is the lead agent of economic

transformation; government is Evan’s (1995)“handmaiden”.

– IP is for relatively open economies– Exports and diversification seen as tool for productive

transformation.– Openness to FDI

What’s New in the New Industrial Policy?

• Government IP are “walking before running”.– Most IP focused on enhancing competitiveness of

existing goods and services (“IP in the small”).• Pressure of North-South FTAs• China and Asian competition• Exchange rate pressure in S.A.

– IP “in the large” is large “light”• Not heroic bets distant from existing comparative

advantage or learning capabilities.

Country Program In the Small In the LargeBrazil PITCE

Productive Development Policy (PDP)

X

X

X Plano Brasil Maior 2011-2014 X X

Colombia Vision Colombia 2019 and 2032 X X

National Competitiveness Policy X

National Development Plan 2010-2014 (PND)

X

X

Program to Promote World Class Sectors (included in PND)

X

Chile 2007 and 2008 National Strategy for Innovation

X

X

Competitiveness Agenda2010-2020*

X

X

Dominican Republic National Plan for Systemic Competitiveness

X

30 Year National Development Strategy X

El Salvador Five-Year Development Plan2010-2014 X

Mexico Vision 2030 X X National Plan 2007-2012

XX

Panama National Concertation X

Peru National Competitiveness Plan (2003-2010)

X

National Competitiveness Agenda X

Uruguay Industrial Development Strategy (2008)Sectoral Industrial Plans (2011)

X

X

Selection of New Industrial Policies In Latin America

Source: Devlin and Moguillansky (2012)* Discontinued by current government

Colombia’s IP in the Large

Program to Promote World Class Sectors

PND New Sectors based on Innovation

Outsourcing of Business Services ITCSoftware HealthCosmetics BiotechFashion and design ElectronicsElectric energy and transmission LogisticsAuto parts and vehicles DesignChocolate Confection Energy and Natural ResourcesHealth Tourism Creative industries

Source: Ministry of Planning

Red= new emerging world class sector

What’s New in the New Industrial Policy?

• Innovation is emerging as a component of IP: Brazil, Colombia, Mexico, Uruguay, Chile.

• Many IP strategies have serious financial commitments.– Especially robust in Brazil (BNDES) and Panama

(Canal revenues)– Chile and Colombia earmark mining royalties– Some rely too heavily on donors and IFIs (Peru,

DR).

What’s New in the New Industrial Policy?

• More attention to coordination and monitoring

• IP linked to Public-Private Alliance Councils– Less “top down”– Aiming at Rodrik’s (2006)“social process=IP

strategic policy outcomes”

Field/country Alliance Type of Alliance Structure

Brazil

National Sectoral Sectoral

Economic and Social Development Council (CDES)Advisory body to the president on state reform and on medium/long-term issues National Industrial Development Council (CNDI) Supervises industrial development polices Sectoral and state-level councils and forums for public-private alliance dialogue on the implementation of the PDP

Formal, structured Formal, structured Formal ad hocbut in the process of being structured

Representatives of workers, businesses, social movements and the government organized in thematic groups. More than 100 council members chosen by the President 23 ministries, 14 representatives of industry and the President of the BNDES Sectoral and thematic business associations and representatives of sectoral and thematic public agencies

Chile

Sectoral National

Productive Development Forum – Council for productive development (1994–99) Various alliance forums set up at different times on different issues National Innovation Council for CompetitivenessDefines the innovation strategy and advises the presidency on innovation policies

Formal, structured Formal ad hoc Formal, structured

Tripartite partnership: Government-unions-business24 council members chaired by the Minister of Economy A president, 5 ministers, and 11 representatives of business, science, and academia.The alliance operates on different levels: at the executive and grassroots levels, among the leaders of the clusters and through participation in the Regional Productive Development Agencies (ARDP)

Colombia

National National

National Planning CouncilConsensus building on the National Development Plan National Competitiveness CommissionImplememntation of the strategy for productivity and competitiveness

Formal, structured Formal, structured

Composed of representatives of the various civil society groups Chaired by the President with the participation of businesses, academia and unions, public agencies, private organizations, and regional competitiveness commissions

El Salvador

National Economic and Social CouncilPresidential Advisory body

Formal, structured 24 business associations, 24 representatives of social groups, 5 government representatives

Illustration of Private-Public Alliance Councils in Latin America (I)

Source: Devlin and Moguillansky (2012)

Mexico

National Consultations by the Presidency Formal ad hoc Private sector participation through consultations and negotiations with business associations, unions, other members of civil society.

Panama

National National Concertation for DevelopmentPreparation of national development strategy

Formal, structured Council with 58 representatives of business, unions, the Church, social sectors, indigenous groups political parties and the government at the central and local levels

Peru

National National AccordAdvice to the Executive

National Competitiveness CouncilDesign and Implementation of a strategy

Formal Structured

Forma Structured

40 members made up of Prime Minister, ministries, business, labor, political parties, farmers, universities, churches, regional representatives and activists

Prime Minister, ministers, business, labor and INDECOPI (NGO that monitors competition policy)

Dominican Republic

National National Competitiveness CouncilDesign and implementation of a strategy

Formal Structured President, Ministry of Economy, Planning and Desarrollo, 8 representatives from ministries or sectoral associations and 8 private sector individuals.

Uruguay

National Sectorial Tripartite Councils Formal Structured Sectorial Ministries, Cámaras empresariales sectoriales , representantes de trabajadores del sector, en algunos casos representantes de ANNI

Illustration of Public-Private Policy Alliance Councils in Latin America(II)

Source: Devlin and Moguillansky (2012)

Alliance Councils Are Still A Work in Progress: Some Governance Problems (I)

• Councils of government more than councils of state• Representation that are not fully representative.• Participation of important hosted MNCs is rare.• Plenaries can have too many participants for

effective dialogue and problem solving.• Lack of engagement of minister of finance can dilute

access to budget.• Inactivity of Councils erodes credibility.• Major players not discouraged in their efforts to

bypass Council via bilateral lobbying.

Alliance Councils Are Still A Work in Progress: Governance Problems (II)

• Councils do not have well-financed and independent admin/technical secretariats.

• Governance structure and methodologies of dialogue do not overcome mistrust or indifference between government and business.

• Low transparency• Poor communications between national and regional

councils• Regional/ local counterpart councils have low

technical capacities.• No independent evaluations of governance.

What’s Old in the New IP• Some remnants of the “old” IP

– Lack of a professional civil service- the Achilles’ heel of IP!!– Lack of semi-independent statutory public executing

agencies– Low fiscal space for the public sector action(“taxes”)– “Refounding syndrome”– Fragmentation and duplication of support programs– Little or no evaluation of the impact of policies and

support programs– Weak regional/local counterparts– Still often middling enthusiasm of the private sector

Slightly Existential Issues

• Hausmann’s (2008) “Bandwidth” and “Complexity”– The extent “open architecture” is the preferred form

public-private alliances(PPA)?– Does lobbying serve well as a proxy for decentralized

PPAs?• Should IP engage the big oligopolistic economic

groups with risks of state capture? – To maximize their linkages to the domestic economy– Encourage them to do R&D and upgrade to new more

complex activities.

Conclusions• Latin America needs IP to accelerate lagging growth and

transformation.• The “new” industrial policy exhibits encouraging

characteristics compared to the “old” industrial policies of 1950-1980.

• PPAs are an enormous advance but their serious governance problems must be addressed.

• There are remnants of the characteristics of the “old” IP that hinder the effectiveness of IP and must be addressed.– The lack of a very professional, capable and well-paid civil

service is the Achilles' heel of the new IP. • Professionalization should be endogenous goal of IP.

– Tax issue• The New IP is still a “work in progress”. Considerable room for

improvement.

Thank You!!!

Graciela.Moguillansky@gmail.com International Consultant

Roberttdevlin@aol.comCommuniqué International andJohns Hopkins SAIS